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Payroll in Practice: 5.16.2022

May 16, 2022, 3:40 PM

Question: An employer is planning to pay temporary lodging expenses for an employee who will be on an assignment that may exceed one year. Normally, the employee works at the corporate headquarters. However, for the duration of the assignment the employee will work three weeks of each month in another city and the remaining week at headquarters. Does the payment for the lodging expenses qualify for exclusion from the employee’s wages as travel away from home?

Answer: Whether the travel expense reimbursement in this case qualifies for exclusion from wages depends on whether the employee is traveling to the same city during the assignment or to different cities for periods of less than a year during the assignment.

Assignments to different cities for three-week periods would be considered separate temporary assignments and the employee’s tax home would remain at the home office.

An assignment to one city for the duration of the project would be considered an indefinite assignment since the assignment could exceed one year even if it does not. An indefinite assignment, or one that is expected to be permanent, creates a new tax home for the employee in that city.

The employee’s tax home is the employee’s principal work location and is not necessarily where the employee maintains an abode. Generally, when there are two regular places of business, the principal location is where the employee spends the most time, engages in most of the business activity, or generates most of the income.

For an indefinite assignment in which the employee works more time at the remote location, the remote location becomes the employee’s tax home, and the home office is an away-from-home location. Travel to and from the home office and allowable business-related living costs at that site may be excluded from the employee’s gross income if reimbursed and paid under an accountable plan. This may include some costs for living at the employee’s personal home if that is in the locale of the corporate home office.

Living expenses at the new location would not qualify as travel away from home and would not be excluded travel expenses.

Brief interruptions in the assignment by having the employee work in the home office do not change the nature of the assignment. A long enough break could possibly create a new temporary assignment even if the employee is sent back to the same city. In Blatnick v. Commissioner (56 T.C. 1344, 1348, 1971), the tax court said: “Brief interruptions of work at a particular location do not, standing alone, cause employment which would otherwise be indefinite to become temporary.” This is referenced in Chief Counsel Memorandum CCA 200020055.

On that same basis, the same chief counsel memo said that a three-week break was clearly not enough to start a new 12-month period for a temporary assignment. The memo also said that a seven-month break would be considered enough of a respite. However, the broad span between the two periods is not helpful. As a practical matter, breaks of two to three months may be sufficient, but one week is not enough.

Question: A child-care provider plans to offer child-care services to its employees at a discount or, in some cases, at no charge. What portion of the value of the provided services must be included in employee wages?

Answer: There may be two different fringe benefits this employer can use. An employer may offer one or both as separate benefits. The two benefits are an employee discount and a dependent care assistance program.

Generally, an employer may exclude the value of an employee discount by limiting the amount of the discount. For services such as child care, the employer may exclude up to 20% of the price the employer charges nonemployee customers for the service. Any discount exceeding 20% must be included in employee wages. For a discount on merchandise or other property, the discount may not exceed the employer’s gross profit percentage multiplied by the price the employer charges nonemployee customers for the property.

The value of benefits an employer provides to employees under a DCAP may also be excluded from wages if the employer reasonably believes the benefits may be excluded from the employee’s gross income. A DCAP must be in writing in order for the employer to exclude benefits from wages.

An employee can generally exclude from annual gross income up to $5,000 ($2,500 if married filing separately) of DCAP benefits. The benefits must be provided to enable the employee (and spouse) to be employed. However, the exclusion cannot be more than the lesser of the earned income of either the employee or employee’s spouse. Special rules apply to determine the earned income of a spouse who is either a student or is not able to care for themself. These details are explained in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.

A day care center, as an employer, may have a DCAP under which the employer may provide any amount of dependent care assistance, but only $5,000 of it may be excluded from an employee’s wages. The limitation includes any employee pretax contributions to a flexible spending arrangement. The employer might not know how much the employee may exclude based on the income requirement or the employee’s marital filing status, but that is sorted out on the employee’s income tax return using Form 2441, Child and Dependent Care Expenses.

The employer assistance plan is not the same as the dependent care credit that the employee may claim on Form 2441. However, employer-provided dependent care that is excluded from employee income adjusts the amount of the employee’s dependent care costs that are available for the tax credit. If the employer excluded more than the employee is eligible to claim, the excess will be added to income on the employee’s tax return. This could happen because of the earned income limitation or because the employee did not provide required information on Form 2441 regarding dependent care providers.

In contrast to a DCAP, an employee discount program does not have an annual limitation and does not require a written plan, although it is a good idea to have one. In addition, the discount can be granted for care provided for reasons other than to enable the employee to work – for example, to provide opportunities for the child to socialize with other children or for the parent to engage in activities such as shopping, appointments with professionals, or exercising.

A day care center may offer an employee discount on day care and exclude from wages up to 20% of the regular price. As explained above, any discount exceeding that is taxable. For example, if the regular price is $100, and the employee pays $80, there is no taxable benefit. But if the employee pays $50 then $30 is taxable, and if the employee pays $0 then $80 is taxable.

For either benefit, any amount provided that exceeds the limitations under the applicable benefit would be included in employee wages.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., or its owners.

Author Information

Patrick Haggerty is the owner of a tax practice in Chapel Hill, N.C., and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.

To contact the editor on this story: William Dunn at wdunn@bloombergindustry.com